Friday, May 7, 2010

Economic Calculus for Employer Provided Health Insurance

W.C. points out that some big companies are contemplating dropping their health coverage to save dollars. The weak mandates are blamed as the culprit. But a little analysis reveals that this is only part of the equation.

The linked article uses AT&T as an example of how a large company could save money by dropping coverage.

Looking at the chart, at first glance it looks like AT&T could save a cool $1.8 billion by dropping coverage for employees, because the mandate penalty is only $600 million for their 283,000 employees. But here is the fallacy; before Obamacare passed, they could have saved even more by dropping coverage for all employees, $2.4 billion. So the weak mandate can't be the whole story, because they could have dropped coverage any time before. So why now? It must be speculation that the government subsidies to buy insurance in the new exchanges will be high enough that their employees won't quit over the issue of dropped coverage. So the amount that government is subsidizing insurance and the quality of that coverage, as perceived by the employees, becomes the key issue to be analyzed.

Why did AT&T provided coverage in the first place? Out of the goodness of their collective hearts? I know better. Rounding the figures to make the math easier, (this is a blog, not schrool after all) we see that AT&T spent about $10,000 per employee on health insurance in 2009. But the value to the employee far exceeded that amount, because it was not taxed, either through payroll (i.e. social security) taxes nor through income tax, state or federal. Using a 25% federal rate, 15% payroll tax, and nominal 5% for state tax (YMMV) yields a total tax rate of 45% that was avoided on that $10,000 benefit. (By the way, where does the left get off saying we don't pay much in taxes, 45%, that's a lot.) If the employee had to spend his/her own after tax dollars on health care, their employer would need to increase their total pay package to $18,000 (rounding) in order for the employee to have $10,000 to purchase the same policy. The $8000 difference is a give back in the form of taxes.*

The tax code is the big driver pushing employers to provide health insurance as a benefit; it allows them to provided an $18,000 benefit for $10,000 in this case. So how will the government insurance exchanges work? Who knows? I think it is obvious from this example above that if the exchanges are to come close to matching the benefits provided by employers, they will have to heavily subsidize the exchange, further bloating the deficit. However, is a 40% subsidy realistic? How would employees react if they were given back some of the money spent on health insurance but found that the exchanges were much more expensive?

I don't think we will see a big move by firms that already provide health coverage to expand drop the coverage, because I don't see the exchanges competing effectively either on price, because of the tax advantage, or on quality, because they will be run by the government. They might actually attract a lot of people who have pre-existing conditions, so their costs are probably underestimated. But can't we say that about any government program.

The retirees are a whole other matter, but I lack the knowledge to comment yet.

*Using a calculator the numbers look like this:
$ 8480 = average amount AT&T spends per employee on health insurance.
$15419 = average increase in pay package if employee purchased identical policy with after tax dollars.


  1. Thanks for the link!

    A couple other factors:

    - New ObamaCare mandates will make health insurance more expensive for companies to provide than current coverage

    - High unemployment means employees don't have bargaining power and are much more likely to take any job they can get, with or without employer-based care.

    I think it's quite likely that in a deflationary environment, competitive forces will force companies to cut costs rather than offer the most attractive benefit packages.

  2. Ironically this does seem to meet the conservative goal of de-linking health insurance from employment. People will no longer be stuck in a job just because of the benefits it offers; when no employers offer benefits, employees are free to move where they like (assuming there are any jobs left).

    But just like Soylent Green, this is a laudable objective, but achieved in a not-so-laudable way.

  3. W.C.
    Good points all. I think this is a very tricky thing to predict, but we seem to be entering an era where there is a decoupling of health insurance from employment, as anonymous points out.